Not So Many Happy Returns

At PortfoliOK, we believe the majority of investors aren’t getting the returns they’re entitled to expect.

So, as a market investor, how much money should you be making? What is the true par score for an investor?

You should at least expect the average return that each market naturally generates.

For Australian share investors the “market” is the stock market, represented by the All Ordinaries Index. It may surprise you to learn that the average annual return for the Australian Share Market for the five years to 31 March 2008 was 18%.

Did your portfolio generate an 18% return over that period? No? Then you (or your advisors) probably took more risk in an effort to beat the market, but ended up generating a worse than average return. If so, you are definitely not alone – that’s the standard scenario for the majority of personal investors.

When economies expand, companies make more money and shares and markets increase in value. Generally, if the market does well then everyone does well. But, if the market doesn’t do well, everyone loses.

No investment professional can conjure up returns on investments if the company profits and resultant share price increases are just not there. 

A dollar invested in the Australian share market in January 1985 was worth about $18 at 30 June 2008. Other markets generated different rates of return, all being above cash in that period.

How’s your dollar doing?

So, where does your investment dollar sit on this chart of returns?

Unfortunately, our experience reviewing numerous portfolios and managed funds, and doing other research, strongly suggests that your investment dollar has been underperforming relative to the average market dollar.

Perhaps it would it ease your pain to learn that Australian investors are not alone in this regard.
As shown in the graph below from the Economist in February 2008, the average US investor is also getting returns well below the market.

The effect of sub-par returns on long-term wealth is staggering

The effect on long-term wealth from poor investment performance is at the very least unsettling. For example, a 2% weaker return over 20 years results in $200,000 less in retirement.

Why do so many portfolios under-perform?

In our Why Investing is So Hard section we examine the market forces that make investing difficult, as well as some of the common human biases that interfere with rational investment decisions. Elsewhere on the PortfoliOK website we cover issues specific to managed funds, direct share investments and superannuation.

Overall, our analysis highlights the value of having your investment portfolio assessed.

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